Russia abandons hope of oil price recovery and turns to the plough

The Kremlin has launched an incredible volte-face in economic policy and turned to traditional industries like farming in the face of tumbling oil prices

By Ambrose Evans-Pritchard, in Moscow

Russia has abandoned hopes for a lasting recovery in oil prices, bracing for a new era of abundant crude as US shale production transforms the global energy market.

The Kremlin has launched a radical shift in strategy, rationing funds for the once-sacrosanct oil and gas industry and relying instead on a revival of manufacturing and farming, driven by a much more competitive rouble.
"We have to have prudent forecasts. Our budget is based very conservative assumptions of oil at around $50 a barrel," said Vladimir Putin, the Russian president.
"It is no secret that if the price goes down, investment peters out and disappears," he told a group of investors at VTB Capital's 'Russia Calling!' forum in Moscow.
The Russian finance minister, Anton Siluanov, said over-reliance on oil and gas over the last decade had been a fundamental error, leading to an overvalued currency and the slow death of other industries in a textbook case of the Dutch Disease.
"We should stop caring so much about the oil industry and leave more space for others. We have to take very tough decisions and redistribute our resources," he said.

The new $50 benchmark for oil is even lower than the Russian central bank's "extreme scenario" of $60 first prepared last year.

The new realism has forced the Kremlin to ditch a raft of budget commitments and to stop topping up the pension reserve fund. Oil and gas taxes make up half the state's revenue, and almost 70pc of Russia's exports.

Igor Sechin, chairman of Russia's oil giant Rosneft, accused the government of turning its back on the energy industry, lamenting that his company is being throttled by high taxes. He warned that the Russia oil sector will slowly shrivel unless there is a change of policy.

Mr Sechin said Russia's oil companies are already facing "negative free cash flow". They face an erosion in output of up to 6pc over the next three years as the Soviet-era fields in Western Siberia go into decline. "You have to maintain investment," he said

Rosneft, the world's biggest traded oil company, is facing taxes and export duties that amount to a marginal rate of 82pc on revenues. "This is enormous, it's unbelievable. The attractiveness of the oil industry is all about tax rates," he said.

He stated caustically that the government cannot seem to make up its mind how to tackle the economic crisis, openly attacking ministers sitting next to him at the VTB Capital forum. "We have lots of models but unfortunately we are failing to see any actual growth," he said.

Mr Sechin said Russia faces stiff competition from Saudi Arabia, which has begun ship oil at cut-throat prices into the Baltic through the Polish port of Gdansk, taking local market share from under the noses of the Russians.

Vladimir Putin (left) and Igor Sechin (right)

But the 'game changer' is US shale that has displaced Saudi Arabia as the fundamental price-setter for the world. He said the immediate prospects of the global oil industry now depend on whether shale producers have enough hedging contracts to last beyond the end of the year.

Russia is currently the world's largest oil producer, extracting 10.7m barrels a day (b\d), but is living off legacy investments. Plans to develop the off-shore fields in the Arctic and the vast shale reserves of the Bazhenov Basin are not viable at current oil prices, and in any case rely on imported technology that is subject to western sanctions.

Mr Putin said the economic crisis has touched bottom and the decision to let the currency slide by 50pc rather than waste reserves defending the exchange rate is starting to bear fruit.

"We are seeing the first signs of stabilization, even though some sectors of the economy are still in recession. We are seeing more confidence in manufacturing industries. Things are looking up," he said.

Russian companies have survived being shut out of the global capital markets for most of the last eighteen months and have repaid much of their hard currency debt as it comes due, greatly reducing their vulnerability.

Capital is no longer fleeing the country. There were net inflows of $5.3bn in the third quarter, the first positive figures since 2010. "What it shows is that markets are responding very quickly to what is happening in our country", he said.

The International Monetary Fund is less sanguine. It has cut its forecast for Russia yet again, expecting the economy to contract by 3.8pc this year and a further 0.6pc next year.

A Clash of Western Civilizations

Diana Pinto

European Union star insignia painted on concrete wall.

PARIS – Images from the refugee crisis in Europe have juxtaposed smiling crowds in Vienna and Munich with grim, unwelcoming faces in Budapest. The result has been a surge of commentary about the “two Europes” – one welcoming, one forbidding. The truth is that disagreements over whether countries should take in refugees are hardly unique to Europe.
The contrast on display is symptomatic of a deep rift within the Western world.
The divide cuts across the United States, the European Union, and Israel – and, equally important, across Jewish and Christian communities. On one side are politicians like German Chancellor Angela Merkel, European Commission President Jean-Claude Juncker, US President Barack Obama, former Israeli Welfare and Social Services Minister Isaac Herzog, and religious figures like Pope Francis.
On the other are Hungarian Prime Minister Victor Orbán, French nationalist politician Marine Le Pen, US Republican Presidential Candidate Donald Trump, Israeli Prime Minister Benyamin Netanyahu, the Cardinal of Hungary, Péter Erdő, and legions of other Eastern European clergy.
Each of the camps shares a fundamental outlook on the role refugees play in society. The first group consists of those who consider democratic values to be more important than ethnic or national identities. In their view, anyone who abides by a country’s laws can become a full-fledged citizen and contribute to the vitality of his or her adopted country.
According to this view, inclusion of “the other” – people from different countries and cultures – does not destroy national identity; it enriches it with new ideas and behaviors. Proponents of such cross-fertilization point to outsiders or their descendants who have attained high positions in their adopted countries: a Latino member of the US Supreme Court, German constitutional lawyers of Turkish origin, French prefects whose parents and grandparents arrived from North Africa, British lords and baronesses with roots in Africa and the Caribbean, and Italian writers of Indian descent.
Accordingly, advocates of this worldview regard fences and walls as insults to humanity, proof that those who build and maintain them have no trust in their countries’ vibrancy and strength.

Above all, they adhere to a universal discourse based on international law and ethical, moral, and religious principles.
Christians and Jews in this camp stress that welcoming strangers and people in need lies at the very heart of their respective faiths. Taking in the needy is an ethical imperative, not a politically conditioned choice. Despite the fact that most refugees come from Arab lands known for their anti-Semitism and anti-Israel stance, Jewish intellectuals in this camp have been unanimous in welcoming them with open arms. Meanwhile, Pope Francis has been clear that Christian values include caring for refugees.
On the other side of the divide are those who fear the other as a threat to national identity.

Their gut-level response is to build fences and walls, as long and as tall as possible, whether on the border between Mexico and the US, on Israel’s border with Egypt, or on Hungary’s border with Serbia (or even with fellow EU member Croatia). It is no coincidence that Hungarian and Bulgarian policymakers have turned to Israeli companies to seek technical advice on how to build their fences.
Members of this camp do not believe that dynamic civil societies can integrate people of different origins within open democratic settings, or that their countries can benefit from welcoming them. The risk of a few bad apples (Mexican drug dealers, Islamic terrorists, economic migrants, or those wishing to cash in on welfare systems) outweighs any benefits that the vast majority of young and determined newcomers could bring.
Nor does this camp believe in international conventions on the rights of asylum-seekers or the duty of signatory countries to take them in. Any appeal to human rights is derided as dangerous naiveté, as are references to moral or religious imperatives. Instead, the emphasis is on protecting the “nation” against foreign viruses. These views are promoted not only by politicians, but also by leading religious authorities, including the evangelical right in the US, Catholic prelates in Eastern Europe, and Israel’s nationalist rabbis.
This clash of Western civilizations could not be more important. Those who shut doors and build walls do not belong to the same family as those who welcome the needy in the name of higher values.
The foundational principles of our democratic traditions are at stake – principles that are being weakened by the clash itself.

Review & Outlook

The Mullahs Say Thanks

Iran becomes more belligerent in the wake of the nuclear deal.

Washington Post reporter Jason Rezaian in 2013.

Washington Post reporter Jason Rezaian in 2013. Photo: zoeann murphy/washington post/Reuters

President Obama and his foreign-policy admirers—a dwindling lot—hoped that the nuclear deal would make Iran more open to cooperation in the Middle East and with the U.S. Mark this down as another case in which the world is disappointing the American President.

Iran’s judiciary on Monday announced that Jason Rezaian, the Washington Post’s Tehran correspondent, has been convicted. He was on trial for “espionage.” Security forces arrested Mr. Rezaian and his wife, journalist Yeganeh Salehi, in July 2014. Ms. Salehi was later released, but the regime has held Mr. Rezaian “in a black hole for 14 months,” as his brother, Ali, told us. Mr. Rezaian, a U.S. citizen, has been denied even the basic rights the regime sometimes affords political prisoners, including bail and phone calls.

The timing of the conviction won’t escape students of history. Friday was the 444th day of his captivity. That was the number of days U.S. diplomats in Iran spent as hostages following the 1979 Islamic Revolution. Mr. Rezaian’s conviction three days later is the mullah equivalent of mailing a dead fish to an adversary.

Mr. Rezaian’s brother also told us that “I’d like the U.S. government to say [about Jason’s detention]: This kind of behavior has consequences. Up to now this has had no consequences. What have been the consequences? It hasn’t stopped them from getting their nuclear deal. And it hasn’t stopped them from getting over half a billion a month in sanctions relief since we started talking to them.”

The Iranian judiciary answers to Supreme Leader Ali Khamenei, who last week issued an edict banning any talk with Washington. Supporters of the Iran deal are sure to blame Mr. Khamenei and his hard-line faction for the Rezaian case and the regime’s permanent anti-American posture. President Hassan Rouhani and Foreign Minister Javad Zarif, deal supporters say, don’t share Mr. Khamenei’s view of America as the Great Satan.

Perhaps. But in a theocracy led by a man who rules as the Almighty’s vicegerent on Earth, the views of Messrs. Rouhani and Zarif count for little. That’s doubly so when it comes to Iran’s weapons programs. There, too, Tehran is already defying the U.S. and reneging on previous commitments.

On Sunday the regime tested a new long-range, guided ballistic missile code-named Emad (“Pillar”) in violation of the nuclear deal. United Nations Security Council Resolution 2231—which passed shortly after the agreement to harmonize its provisions with international law—prohibits Iran from conducting ballistic-missile work for eight years.

But the mullahs are nothing if not impatient, and the Islamic Republic has already made clear that it doesn’t intend to abide by the provisions of Resolution 2231 it dislikes. Testifying before the Senate over the summer, U.S. Secretary of State John Kerry repeatedly vowed to sanction Iran if it cheated on missiles. Well, here’s an early test case, Mr. Secretary.

The more likely outcome is that the Obama Administration will find a way to explain that the missile test doesn’t violate the nuclear accord that Mr. Obama considers a crowning achievement. Meanwhile, Iran’s government will bank up to $150 billion that it can deploy to back its militia proxies in the Middle East. Add the new Iran-Russia offensive in Syria, and Tehran would appear to have taken the nuclear deal as a signal that it can now do whatever it wants without consequence.